Wednesday, December 19, 2012

CPI and Chain Weighted CPI Explained

Definition of 'Consumer Price Index - CPI'

A measure that examines the weighted average of prices of a basket of
consumer goods and services, such as transportation, food and medical
care. The CPI is calculated by taking price changes for each item in the
predetermined basket of goods and averaging them; the goods are
weighted according to their importance. Changes in CPI are used to
assess price changes associated with the cost of living.

Investopedia explains 'Consumer Price Index - CPI'

The U.S. Bureau of Labor Statistics measures two kinds of CPI
statistics: CPI for urban wage earners and clerical workers (CPI-W), and
the chained CPI for all urban consumers (C-CPI-U). Of the two types of
CPI, the C-CPI-U is a better representation of the general public,
because it accounts for about 87% of the population.

CPI
is one of the most frequently used statistics for identifying periods
of inflation or deflation. This is because large rises in CPI during a
short period of time typically denote periods of inflation and large
drops in CPI during a short period of time usually mark periods of
deflation.

Definition of 'Chain Weighted CPI'

An alternative measurement for the Consumer Price Index (CPI),
removing the biases associated with new products, changes in quality and
discounted prices. The chain weighted CPI incorporates the average
changes in the quantity of goods purchased, along with standard pricing
effects. This allows the chain weighted CPI to reflect situations where
customers shift the weight of their purchases from one area of spending
to another.
Read more: http://www.investopedia.com/terms/c/chain-linked-cpi.asp#ixzz2FVGcl8Cj

Investopedia explains 'Chain Weighted CPI'

The chain weighted CPI incorporates changes in both the quantities and
prices of products. For example, let's examine clothing purchases
between two years. Last year you bought a sweater for $40 and two t-shirts at $35 each. This year, two sweaters were purchased at $35 each and one t-shirt for $45.

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